After the release of the Bitcoin software in 2011, many of the early applications that adopted the network (i.e., SatoshiDice) used bitcoin less as a pure payments service, and more as an open-access messaging layer that could persist in the absence of centralised management through the distribution of transaction fees to participants in the network. These early applications would often send and receive payments with their users, but many would also use the blockchain to broadcast non-payment information across the network, typically injecting such information into transactions in surreptitious ways, one such way being the encoding of human-readable information into false addresses to which minuscule and unspendable amounts of bitcoin were sent (which may be referred to as “dust transactions”).
The desire of many developers to use the Bitcoin network as an open-access and uncensorable messaging platform eventually drove them into conflict with other developers who were focused on making Bitcoin a more mainstream digital currency, with the conflict between the two camps arising over the fact that the Bitcoin blockchain compiles every transaction ever sent into a permanent ledger that needs to be stored in perpetuity by many of the nodes in the network. Since applications that added non-payment information to transactions forced this data to be added to the Bitcoin blockchain, and since this blockchain needs to be stored by most nodes in the system in perpetuity, messaging applications increased the costs of running nodes in the network much more than did payment-focused applications.
In short time, it became clear that the growth of the blockchain was posing an economic problem that threatened to undermine the network. As the size of the blockchain grew, developers feared that the rising bandwidth and storage requirements for running a full copy of the Bitcoin software would result in many nodes in the peer-to-peer network eventually shutting down, something that would hurt the decentralization of the Bitcoin network. The problem in essence came about because of Bitcoin's proof-of-work security system, which directed all of the revenue generated by the system to a special class of nodes called “miners” who secured the network from attack but did not need to contribute significant amounts of bandwidth or connectivity to the peer-to-peer network to do so. In economics, this is known as a “free-rider” problem as the “miners” were able to “free-ride” on a peer-to-peer network provided by other actors: they could source transactions from the network and use it to generate income, but did not need to contribute commensurate revenue to support the peer-to-peer network themselves, and in fact would work to undermine it by funding private, competing channels for transaction and block distribution such as the Bitcoin FIBRE network.
As a result, to help keep the costs of running nodes in the peer-to-peer network reasonably low and thus preserve the decentralization of the network, many core Bitcoin developers began a rearguard campaign against the inclusion of non-payment information in Bitcoin transactions, with prominent developers first labelling applications that persisted in writing such information to the blockchain as “spam” and then embracing a strategy to cripple Bitcoin's on-chain transaction capacity in order to drive up the fees that transactions would need to pay for inclusion and thus drive these “messaging” transactions off the network through price pressure. In some cases, this conflict even led to vocal disagreements in the Bitcoin community over such reasonably trivial things as the question of whether transactions should support a 40 or 80-byte user-editable OP_RETURN field.
As alternatives to Bitcoin have emerged in recent years, this problem has gone unaddressed. While there have been efforts to replace Bitcoin's proof-of-work system, none has been developed which satisfactorily solves this “free rider” problem. One of the more well-known alternatives to proof-of-work is being developed by the Ethereum™ Network, for instance, which calls its new approach a proof-of-stake system. While this new security method avoids the need for computers to burn electricity to secure the network, its security function does not solve the “free rider” problem described above: the economic issue of full node under-provision that happens because miners/stakers (the nodes that provide security against various forms of attack on the network) are paid out of transaction fees while nodes in the peer-to-peer network (which provide bandwidth and open access) are expected to operate on a volunteer basis.
In technical terms, current blockchain functionality is not scalable in terms of maintaining security and decentralization, including maintaining the associated bandwidth and connectivity that the decentralization provides.
Hence, there is a need for more robust and scalable solutions for implementing blockchain transactions.